Jul 11, 2008

Business - Oversupply/rentals to kill malls

Eight years ago, mall developers couldn’t get enough of Gurgaon. The lure of big bucks in the booming retail sector was hard to resist and herd mentality ensured that malls mushroomed all over the place.But sustaining them proved to be a different ballgame altogether and now, many of these malls have become defunct or been converted into commercial spaces. The story isn’t exclusive to Gurgaon. Mall developers in other metros and tier-I cities are set to meet the same fate, say retailers. If retailers who conduct business in these malls are pessimistic, the situation is clearly grim. Though no official data exist on the number of malls being developed, industry reports peg the number of malls coming up in India in the next three years at 350. Of these, about 200 may reach completion. Govind Shrikhande, chief executive of retail chain Shoppers Stop, doesn’t think even 80-100 of these malls would survive. “There is only so much that a specific catchment area can absorb successfully,” he says. Srinath Sridharan, the vice-president and head of strategic alliances at Wadhawan Holdings, which owns the Spinach, S-mart and Sabka Bazaar retail chains, presages far darker times. “You have to be optimistic to say only half of the malls becoming defunct. I feel 80% of them will not even see the light of day. Retailers today cannot afford the high rentals being demanded. It’s difficult to say if rentals are a part of sales or the other way round,” he says. Saturation in some areas and high rentals are the big negatives. Sandeep Runwal, managing director of Runwal Group, which operates R Mall in Mumbai, blames high property prices and rising construction costs for the steep rentals. Another gripe retailers have is that most mall developers only focus on big projects. They often don’t get the concept of retail right or work on the right designs or product mix. “For example, Shoppers Stop with HyperCity is a good combo but it won’t work to have a Big Bazaar at the same place because that caters to a lower segment of consumers,” a retailer, who did not wish to be named, points out. Too many of them leads to implosion. Amber Maheshwari, director of Mumbai-based real estate consultant DTZ, said one successful mall brings 6-7 more to its area. “This is a disaster in itself. Then, there aren’t enough retailers to fill the malls, especially with the high rentals around.” Standing out in the crowd becomes critical, thus. To do that, developers have to make their malls unique and find a good anchor retailer, says Nimish Shah, vice president of retail at Spencer’s, the supermarket chain owned by the RPG group. “Right now, we are witnessing an oversupply of vanilla malls,” he says. Developers, however, remain unfazed. Runwal agrees many malls will shut down unless they get their business model right, but asserts that the potential for such properties remains huge. “This is just the beginning. We are all learning from our mistakes, improvising and innovating. It is a high-risk business but everyone still wants a piece of it,” he said. Sanjay Prabhu, general manager of Inorbit Mall in Mumbai, concurs getting the business model right is an imperative. “Many developers are already facing difficulties getting retailers on board. They have all jumped in to make hay but are not really focusing on what the retailer wants,” Prabhu said. So what happens to those superfluous malls when the Doomsday prediction comes true? The refrain among retailers is “we don’t know”. Will they recover their investments? No one’s sure. Some failed projects may metamorphose into commercial spaces, but that’s easier said than done. Retailers also have turned cautious. Those who were on a major expansion spree to gain large footprints have slowed down. They are picking their locations and malls with care, waiting to watch how the market evolves. Developers would find it tough to sell space and operate malls for more than a year unless they bring in retail consultants, designers and managers to build the right business model, say experts.